Higher Passenger Traffic Will Provide A Tailwind To US Airways’ Earnings

US Airways (NYSE:LCC) will announce fourth quarter and full year 2012 earning results Wednesday, January 23. The carrier posted impressive growth in both revenues and earnings in the first three quarters of 2012, driven by growth in passenger traffic and yield. Revenues increased 6.6% y-o-y to $10.5 billion and earnings were $3.70 per share in the nine months ended September 30, 2012, up from $0.33 per share in the year-ago period. [1]

In the fourth quarter, the carrier continued to raise flying capacity on domestic U.S. and Latin international routes to drive growth in passenger traffic. Unit revenue (passenger revenue generated per unit of flying capacity) also increased due to higher passenger fares on certain routes. Thus, growth in fourth quarter top line is likely. A new code share agreement with South African Airways that came in to effect towards the end of the quarter will also contribute to top line growth.

However, hurricane Sandy will impact fourth quarter earnings as US Airways generates a significant portion of its traffic from northeast United States, where the superstorm had struck. We currently have a stock price estimate of $12.73 for US Airways, approximately 10% below its current market price.

U.S. Airways continued to raise flying capacity on domestic U.S. routes and U.S.-Latin America international routes in the fourth quarter to address rising demand for flights on these routes. As a result, passenger traffic for the carrier increased substantially in both these markets.

In the U.S.-Europe routes, which is witnessing demand fall due to the economic slowdown in Europe, the carrier responded by lowering its capacity. As a result, passenger traffic for the carrier declined in this market. Overall, passenger traffic increased 3.1% y-o-y on net capacity addition of 1% y-o-y in the fourth quarter. [2]

Unit revenue, which is an indicator of passenger fares, also increased 3% and 4% in October and December respectively year-over-year while in November it was flat. [2] [3] [4] This growth in passenger traffic and unit revenue will drive growth in US Airways’ top line in the fourth quarter.

Code Share Agreement With South African Airways

During the fourth quarter, US Airways also signed a code share agreement with South African Airways under which the two airlines will be able to sell tickets on selected flights of each other. [5] As a result, the customers of US Airways will have an expanded service network connecting Johannesburg, Cape Town, Durban, East London and Port Elizabeth in South Africa with Washington, New York, London, Frankfurt and Munich. While South African Airways will be able to sell seats on US Airways flights connecting London, Washington, New York, Denver, Dallas, Houston, Las Vegas, Los Angeles, Miami, Chicago, San Francisco and San Diego.

The agreement came in to effect beginning December 19. This will add to US Airways’ top line in the fourth quarter and beyond.

Superstorm Sandy will impact earnings

On the flip side, superstorm Sandy struck the northeast U.S. during the last week of October and first week of November disrupting over 15,000 flights and is estimated to have incurred a negative impact of $30 million on fourth quarter earnings of US Airways. [6] The storm was largely responsible for holding unit revenues of the carrier flat in November.

Overall for full year 2012, both revenues and earnings of US Airways will post strong y-o-y growth driven by higher passenger traffic and yield and adequate capacity management.

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